Centralized vs Decentralized Systems

The basic level of human interaction is based on decisions. Without a decision, humans could not survive. We make decisions to eat, talk, walk and interact with other human beings and objects. With every decision, there is an effect. If you choose to walk you burn calories; if you talk to another individual, ideas are transferred and if you decide to make an action you can produce, maintain or destroy value. Decisions can be made by the self, two individuals or groups. Decisions by individuals shape nations as they evolve; they can be consensual or forced.

A system is an organized scheme or method and decisions are made to drive processes in these systems. Every human group functions with a system or many systems where on one extreme, decisions are controlled by a single individual and on the other extreme every individual makes 100% of their own decisions (a fully distributed system). I will attempt to describe how systems that are more centralized compare to systems that are more decentralized. In the end, all systems function in a world with limited resources and there is a trade-off between resource efficiency and meeting the individual’s needs and wants.


Centralized systems are beneficial because they can increase efficiency in the systems resource handling decision-making process and may lead to more efficient means of production. Nationwide supermarket chains are an example of a centralized system. The individual shopper’s decision is limited to a small generic selection of product when compared to the variety that can be found by shopping at several different local boutique stores. Because of this limited selection, the store maximizes their space and nationwide supply chain efficiencies. In exchange for a limited selection, the customer sees the benefit of lower prices and one-stop shopping.

The centralized resource decision-making of supermarkets works when the decision makers of this centralized system align with the needs and wants of their customers. In the short term, these stores act as an economic boost for communities where these supermarkets are placed. However, when the decisions in this centralized system become misaligned customers will decide to go elsewhere and the store will suffer. The same small group of individuals that created a boost for a local economy can also negatively impact several communities at the same time. Company’s decisions can become misaligned because the company becomes out of touch with the customer.

To see an example of this effect look at the latest Bankruptcy of Sears Holdings Corp. and previous store closures. The leadership team’s decisions at Sears has repeatedly failed to align with their customer’s interest; as a result, the customer went elsewhere and now over 1,000 stores face closure. Individuals will lose their jobs and large empty buildings will sit in these communities underutilized and become an eyesore. These buildings may sit for years empty because the demand for large supermarket sized buildings was limited to only a handful of large nationwide chains.

Compare the centralized model to a model that is closer to the decentralized side of the scale. Instead of one large supermarket chain, a community can have several smaller locally owned stores that each have a focused market. Together these stores carry a wide variety of products, there is a pharmacy, butcher, grocer, furniture store, and automotive supply store. Just like a nationwide supermarket chain these products are selected based on feedback from the customer and trends in the local area. However, the flexibility of the store is much greater. If the owner understands there is demand for a certain product they can make that decision quickly to meet the needs and wants of the customers. Compare this to a supermarket manager who does not have the ability to make changes without requesting approval through a bureaucratic process from the few decision-makers in the organization.

While the customer sees more variety and can choose the product that specifically fits their needs/wants, he pays higher prices for this service. The community as a whole pays for more stability when they accept this as a model. If a small store closes due to the failure of the owner to recognize the customers changing needs and wants this is most likely due to a competitor providing that need and want. The small store closes and the empty space is small enough (when compared to the larger supermarket) that it can be re-utilized by another entrepreneur that has an idea on how to fill another niche in the market. These smaller store closures have fewer individuals losing their job at any given time and the buildings are recycled much more frequently than the large buildings that only fit a certain business model.

In any given instance of a decision, the effects on a group of individuals can be succinctly summarized as centralized systems allow for the most efficient means to distribute a limited variety of resources however this spreads risk to all individuals participating in the system. A decentralized system allows for the most efficient way to distribute the most variety of resources while minimizing the spread of risk for individuals participating in the system.

In other words, a centralized system is susceptible to catastrophic failure as the result of one subsystem failing. This is evident when banking and housing industries collapsed in 2008 because mortgage risk was offloaded and backed by the U.S. Government. The subsystem of loan origination did not properly allocate risk and failed. Housing prices surged because of an artificial demand caused by lenient loans creating a buying frenzy. When home prices corrected downward this caused cascading failures starting with mortgage-backed securities that bled over into the entire banking system. Decentralized systems cannot share this systemic risk; they are redundant and the impact to any given failure will be limited and competition in a market ensures failed systems will be replaced by more efficient systems.

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